Summary judgment reversed in retroactive tax case

Finding a genuine issue of material fact as to when a company’s owners could have discovered that their plans investing in cash value life insurance were actually taxable, the Indiana Court of Appeals reversed summary judgment in favor of the consultant who advised the company’s owners to invest in those plans.

Richard Yarger and Robert O’Brien, owners and operators of Custom Radio Corp. and sole employees of Custom Management Group, appealed summary judgment in favor of Actuaries & Benefit Consultants Inc. and John Fogle. Fogle provided services to Yarger and O’Brien from 1995 to 2004, telling the men that their investments in two specific Welfare Benefit Plans would be tax-deductible.

The plans were designed to comply with 26 U.S.C. Section 419(A)(f)(6) so they would be tax-deductible, but in July 2003, the IRS issued final regulations with regard to that subsection that rendered Yarger’s and O’Brien’s plans noncompliant. As a result, their contributions were retroactively taxable. In February 2004, Fogle recommended that Custom Management switch to a single employer plan, which Custom Radio’s CPA handled.

After being audited by the IRS in March 2008, Yarger and O’Brien were found to owe nearly $750,000 in back taxes, penalties and interest. They settled with the IRS to avoid penalties. In October 2010, after signing the settlement agreements, the two men sued Fogle and his company alleging negligent provision of consulting services and breach of oral contract.

The trial court granted the defendants’ motions for summary judgment, ruling the applicable statutes of limitations had expired.

In Custom Radio Corp., Custom Management Group, Inc., Richard Yarger and Robert O'Brien v. Actuaries & Benefit Consultants, Inc., and John M. Fogle, 32A01-1303-CC-143, Yarger and O’Brien argued that the statutes of limitations didn’t begin until they signed the agreements with the IRS because they didn’t know their damages, but the Court of Appeals found this argument to be misplaced. Their causes of action accrued and the statutes of limitation began to run on the date they knew or, through the exercise of ordinary diligence, could have discovered that their Welfare Benefit Plans were non-compliant with Subsection 419(A)(f)(6) and that their plan contributions were retroactively taxable.

The question is whether they could have discovered this by April 30, 2004. The parties dispute whether Fogle told Yarger there would be no adverse tax consequences if Custom Management switched to a single employer plan. Fogle also said he told Yarger in February 2004 that the IRS had issued final regulations with respect to the subsection in question, but Yarger testified he was unaware of the final regulations and didn’t understand what the terms “experience rated” and “listed transactions” used by Fogle meant until they were audited.

The case is remanded for further proceedings.